It is a common view that the shutdown, the debt-limit debacle and the repeated failure to enact entitlement and pro-growth tax reform reflect increased political polarization. I believe this gets the causality backward. Today's governance failures are closely connected to economic policy changes, particularly those growing out of the 2008 financial crisis.

The crisis did not reflect some inherent defect of the market system that needed to be corrected, as many Americans have been led to believe. Rather it grew out of faulty government policies.

In the years leading up to the panic, mainly 2003-05, the Federal Reserve held interest rates excessively low compared with the monetary policy strategy of the 1980s and '90s—a monetary strategy that had kept recessions mild. The Fed's interest-rate policies exacerbated the housing boom and thus the ensuing bust. More generally, extremely low interest rates led individual and institutional investors to search for yield and to engage in excessive risk taking, as Geert Bekaert of Columbia University and his colleagues showed in a study published by the European Central Bank in July.

Meanwhile, regulators who were supposed to supervise large financial institutions, including Fannie Mae and Freddie Mac, allowed large deviations from existing safety and soundness rules. In particular, regulators permitted high leverage ratios and investments in risky, mortgage-backed securities that also fed the housing boom.

After the housing bubble burst the value of mortgage-backed securities plummeted, putting the solvency of the many banks and other financial institutions at risk. The government stepped in, but its ad hoc bailout policy was on balance destabilizing.

Whether or not it was appropriate for the Federal Reserve to bail out the creditors of Bear Stearns in March 2008, it was a mistake not to lay out a framework for future interventions. Instead, investors assumed that the creditors of Lehman Brothers also would be bailed out—and when they weren't and Lehman declared bankruptcy in September, it was a big surprise, raising grave uncertainty about government policy going forward.

The government then passed the Troubled Asset Relief Program which was supposed to prop up banks by purchasing some of their problematic assets. The purchase plan was viewed as unworkable and financial markets continued to plummet—the Dow fell by 2,399 points in the first eight trading days of October—until the plan was radically changed into a capital injection program. Former Treasury Secretary Hank Paulson, appearing last month on CNBC on the fifth anniversary of the Lehman bankruptcy, argued that TARP saved us. Former Wells Fargo CEO Dick Kovacevich, appearing later on the same show, argued that TARP significantly worsened the crisis by creating even more uncertainty.

In any case, the crisis ended, but rather than simply winding down its short-term liquidity facilities the Fed continued to intervene through massive asset purchases—commonly called quantitative easing. Many outside and inside the Fed are unconvinced quantitative easing is meeting its objective of spurring economic growth. Yet there is a growing worry about the Fed's ability to reduce its asset purchases without market disruption. Bond and mortgage markets were roiled earlier this year by Chairman Ben Bernanke's mere hint that the Fed might unwind.

The crisis ushered in the 2009 fiscal stimulus package and other interventions such as cash for clunkers and subsidies for first-time home buyers, which have not led to a sustained recovery. Crucially, the actions taken during the immediate crisis set a precedent for giving the federal government more power to intervene and regulate, which has added to uncertainty.

The Dodd-Frank Act, meant to promote financial stability, has called for hundreds of new rules and regulations, many still unwritten. The law was supposed to protect taxpayers from bailouts. Three years later it remains unclear how large complex financial institutions operating in many different countries will be "resolved" in a crisis. Any fear in the markets about whether a troubled big bank can be handled through Dodd-Frank's orderly resolution authority can easily drive the U.S. Treasury to resort to another large-scale bailout.

Regulations and interventions also increased in other industries, most significantly in health care. The mandates at the core of the Affordable Care Act represent an unprecedented degree of control by the federal government of the activities of businesses and individuals, adversely affecting incentives to hire and work and eventually worsening the federal-budget outlook.

Federal debt held by the public has increased to 73% of GDP this year from 41% in 2008—and according to the Congressional Budget Office, it will rise to more than 250% without a change in policy. This raises uncertainty about how the debt can be brought under control.

Despite a massive onslaught of legislation and regulation designed to foster prosperity, economic growth remains low and unemployment remains high. Rhetoric aside, many both inside and outside the government quite reasonably seek to return to the kinds of policies that worked well in the not-so-distant past. Claiming that one political party has been hijacked by extremists misses this key point, and prevents a serious discussion of the fundamental changes in economic policies in recent years, and their effects.

Because that is happen when fecal excrement come in direct contact with planar rotational air movement apparatus. Is more to be said, other that political class both conquer and thrive because of crisis?

Glass-Steagall was a straigtforward law put in place after the last bankster depression, it was repealed so they could rob another couple generations of assets.

Timeline of failure: 1913 establishemnt of the FED and the income tax, 1932 Executive order by FDR confiscating Gold, 1972 Nixon ending the Gold Standard, 1960's-1998 dissolution of Glass-Steagall then outright repeal (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act).

You can't steal the assets and labor of the citizenry and expect good things to happen, but that is what has been done.

“I spent two years defending Obamacare. I had constituents scream at me, spit at me and call me names that I can’t put in print. The congressman was not re-elected in 2010 mainly because of the anti-Obamacare anger. When the congressman was not re-elected, I also (along with the rest of our staff) lost my job. I was upset that because of the health care issue, I didn’t have a job anymore but still defended Obamacare because it would make health care available to everyone at, what I >>>assumed,<<< would be an affordable price. I have now learned that I was wrong. Very wrong.”

It is hard for some people to let go of the belief that the government will soothe all their boo boos, even when they are abused and used by the system.

Some people do not wish to be self reliant. If you ever read daily kos it is an eye opener. Most are on welfare as strictly defined as getting more benefits than you pay for, many are on disability or trying to get it.

They see it as a moral imperative to expand entitlements and most of them let it slip eventually that they benefit from this.

I have been reading it for two years. It is rare to see someone on that site paying in more to the system than they expect to get out.

Nice article. Almost got it right, but the problems didn't start in 2008.

The only problem is the economic system allows the politicians to promise everybody everything.

Gun's n ButterWar on the Sand People n Shop-till-ya-drop

The voters don't care as long as they don't have to pay, so the ONLY feedback mechinism was destroyed when the pain of taxes being raised to pay for all the free-shit was taken away.

The voters get free-shit and don't care about political performance in exchange for the politicians needing the financial system to create infinite debt which allowed the top 10% to owning the country.

Somewhere along the way US corporate executives decided that it was in their best interest to not put money into their US infrastructure and instead arbitrage labor over-seas, leverage their companies to the hilt and pump up their own compensation to the point of absurdity (because of course, the consultants that they were paying handsome money to said that a CEO of their starture was worth several billion dollar per year in compensation, and clearly far beyond mere mortals in importance {odd, no?}). They also found that they could make more money for themselves personally, by playing ball with the Wall Street investment banks, one hand washing the other, and bribing government officials than actually earning an honest living through a free market business.

The financialization of our western economies, including a massive misallocation of capital due to personal greed and laziness are what is bringing down the US and the rest of the western dependent economies. Failure brings finger pointing because it takes and actually mature human being to humbley admit fault and sincerely ask for foregiveness. Politicials are fragile and immature as corporate execs... we would expect nothing less than political polarization and finger pointing.